As we’ve discussed, the SBA will soon take the reins over from VA to run the certification process for Veteran-Owned Small Businesses (VOSBs) and Service-Disabled, Veteran-Owned Small Businesses (SDVOSBs). Self-certification for SDVOSBs will go away on December 31, 2023, so be sure to get your SDVOSB ownership and control documents up to snuff in order to stay compliant with the SDVOSB rules. One of those rules concerns unconditional ownership by the veteran. A recent federal court case sheds some additional light on that topic, as explored in this post.
The case is E&L Constr. Grp., LLC v. United States, No. 21-1765C (Fed. Cl. Aug. 3, 2022). The issue of unconditional ownership is one that we see time and time again in our discussions with SDVOSB owners, and owners of other SBA socioeconomic certified companies such as WOSB and 8(a) Program participants. Therefore, it’s worth exploring the additional decisions related to this same set of circumstances.
There is some history to the case (we discussed an SBA OHA decision from 2012 here). Originally, a company called Randy Kinder Excavating protested the award to E&L Construction Group (E&L), arguing that E&L was not a proper SDVOSB. SBA’s Office of Hearings and Appeals (OHA) ruled against E&L, stating that various restrictions on the right of the veteran owner of E&L (including a right of first refusal held by the other owners), meant that the veteran’s owner did not have unconditional ownership.
In particular, OHA noted that, for an SDVOSB, there can be no “impediment to the exercise of the full range of ownership rights” for the veteran owner and the owner “must immediately have an absolute right to do anything they want with their ownership interest or stock, whenever they want.” This language comes from an older OHA decision, Wexford Group International, Inc., SBA No. SDV-105 (2006). Because the E&L veteran owner had restrictions on transfer of ownership, the ownership was not unconditional and not compliant under the SDVOSB rules.
E&L, understandably unhappy with the result, asked a federal court to reconsider this result. The Court of Federal Claims gave E&L a partial victory. It remanded the case back to SBA, asking OHA (who had made the earlier decision against E&L) to explain its reasoning regarding why the same level of unconditional control applies as in the past, even though SBA has since amended its regulations. The court stated: “OHA did not explicitly articulate why it believes the cited rule-making document supports its conclusion that the Wexford definition remains largely undisturbed.”
Upon remand, OHA explained its reasoning more thoroughly, to the court’s satisfaction. OHA noted: “The definition of [SDVOSB] unconditional ownership was thus taken from SBA’s 8(a) BD program.” This means that SDVOSB and 8(a) Programs use the same rules on unconditional ownership. In addition, the only time there can be limitations on ownership is when the ownership interest is used as collateral, such as in connection with a standard commercial loan. OHA addressed the updated rule, and explained why it was consistent with existing SBA interpretations of unconditional ownership–and the court agreed.
This recent decision confirms that the ownership of a key individual in an SDVOSB (or an 8(a) company) has to be free of any restrictions, other than for death, incapacity, and pledges of stock as collateral. Those companies looking to get or remain certified under these programs would do well to heed these warnings and keep their ownership unfettered.
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